Retirement plan switch not an easy choice
- By Bureaucratus
- Aug 09, 1998
When it comes to retirement plans, federal employees are faced with a critical decision: whether to switch to the newer Federal Employees Retirement System or stay with the tried-and-true Civil Service Retirement System.
The decision is not easy. Following are points to get you thinking about the choices and deciding what is right for you.
Your Retirement Plans
When you plan to retire should figure prominently in your decision go with FERS or remain with CSRS. A major attraction of switching to FERS is being able to invest a larger percentage of your salary in the Thrift Savings Plan and receive a matching contribution from Uncle Sam. If you plan to retire in a year, this is a short-lived benefit. Conversely, if you do not plan to retire for quite some time, the ability to contribute to the TSP and receive matching government contributions may be the dominant factor in your decision.
Under FERS, employees age 55 with 10 years of service can receive a reduced annuity. That is not possible under CSRS. If you are 55 and in CSRS, you must have 30 years of service. Otherwise, you will have to wait until you are at least 60. Another consideration: Because cost-of-living allowances under FERS are not as generous as are COLAs under CSRS, the purchasing power of your FERS annuity will erode faster than a CSRS annuity. The cost-of-living adjustment that FERS provides (the Consumer Price Index minus 1 percent) does not completely make up for inflation if the increase in the CPI is more than 2 percent. In addition, COLAs do not start until you are age 62, even if you retire earlier. If you plan to retire early and spend many years as a retiree, this difference could become a prominent factor.
Your Ability to Save
Switching to FERS allows you to contribute more to the TSP and receive matching government contributions. To take full advantage of this provision, you have to be able to stash away a considerable percentage (up to 10 percent) of your earnings. If you are strapped for cash, and every paycheck is needed to meet your financial obligations, you will not be able to take advantage of the opportunity to contribute more to the TSP. In fact, taking full advantage of the TSP contribution opportunity will leave you with less, not more, disposable income in the short term. Be realistic. Know what you can afford to contribute and behave accordingly.
Your Career Plans
An advantage of switching to FERS is that the TSP option is a portable feature you can take with you if you leave federal employment. The money in your TSP account can be rolled over into an Individual Retirement Account or your new employer's retirement plan. Under CSRS, you are locked in to a benefit plan that is not portable. If you leave federal employment, the value of your accumulated CSRS contribution deteriorates over time. That is because your CSRS deferred annuity— which you would be entitled to receive at age 62— is based on your "High 3" years of earnings. If you leave federal employment at age 40, your High 3 will be based on your earnings to date. Twenty or more years later, that High 3 will not have been adjusted for inflation so it will be worth a lot less. That means that the deferred CSRS annuity you become entitled to will not have kept pace with inflation.
On the other hand, during this period of 20 years or more, you will have established entitlement to Social Security benefits and, possibly, a private pension plan. The problem is that you do not know what kind of job you will get and/or what retirement benefits you will become entitled to. Even if you switch to FERS, the outlook is far from certain. When you leave your government job will have a bearing on what Social Security benefits you can become entitled to. Ditto for private retirement benefits.
Your Iinvestment Prowess
Switching to FERS will allow you to contribute more to the TSP and get a government match. Theoretically, this can help you develop a substantial retirement nest egg. However, it also depends on the investment decisions you make. If you place all your TSP money in the Government Bond (G) fund, you are not going to enjoy spectacular returns. The G fund is returning less than 6 percent. If you are in CSRS, you do not have to make investment decisions or take investment risks. What you get at retirement is fixed by formula; not so if you switch to FERS. What you get at retirement— at least insofar as the TSP portion of your retirement income is concerned— depends on the TSP investment decisions you have made while in FERS. Even if you made the maximum contributions, you could still be hurt if your investments have soured or you invest so conservatively that your contributions fail to appreciate substantially.
If your spouse works in the private sector, you are entitled to a spouse's Social Security benefit when your spouse retires. If you are a CSRS retiree, your spousal benefit is reduced by two-thirds of your government pension. FERS retirees who have been in FERS for at least five years are not subject to this "government pension offset."
Try to estimate your CSRS pension benefit and the spousal benefit you are likely to become entitled to. That estimate will tell you what there is to gain from switching to FERS. The Social Security Administration will give your spouse a benefit estimate and help you estimate what yours would be (www.ssa.gov/pebes). To estimate your future CSRS benefit, talk to someone in your personnel department.
Disability and survivor benefits under CSRS and FERS are not identical. In addition, Social Security survivor benefits are not payable in full if you are entitled to a CSRS retirement benefit. While it is not a pleasant task to try to predict how long you and your spouse will live, it must be done to assess the needs of you and your spouse for disability and survivor benefits. Another unpleasant calculation you must make: Will you live long enough to get 40 quarters of Social Security coverage? If your health is precarious, CSRS disability coverage is worth keeping.
Your Social Security Status
If you have never worked under Social Security, switching to FERS will not necessarily entitle you to benefits. It takes 10 years (40 quarters) of coverage to qualify for Social Security benefits, and the amount you are entitled to receive depends largely on your covered earnings and length of coverage. Make certain that you know exactly how much you stand to get in Social Security benefits by switching to FERS.
Although considering the issues identified above should help you in your decision-making process, the decision is a tough one and should not be taken likely. One option worth serious consideration is to consult a financial planner; it is money well spent. The Institute of Certified Financial Planners, at (800) 282-PLAN, can refer you to a certified financial planner in your area.
-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.
* OPM's FERS election opportunities World Wide Web site is a full-featured site with a wealth of information. (www.opm.gov/fers_election)
* GSA's site has a form that will roughly calculate CSRS retirement benefits. It also offers a spreadsheet for FERS calculations that you can download. (www.finance.gsa.gov/CSRS.HTM)
* The CSRS and FERS Handbook. (safetynet.doleta.gov/csrsfers.htm)
* Federal retirement pprograms information from OPM. (www.opm.gov/retire)
* This site offers interactive worksheets for calculating financial planning models, including FERS and CSRS-TSP calculators. (www.comfin.com/index.html)